Canada’s ETF industry has been growing at a steady clip for a number of years now, but 2017 is turning into its best year yet. According to BlackRock’s Follow the Flow data through September, exchange traded funds trading on Canada’s stock exchanges have attracted more than $18.7 billion in new money, shattering the previous high water mark for annual inflows of $16.8 billion reached in 2015.
Here are five trends that have helped drive flows into new record territory this year.
1. Core exposures
Core ETFs have long been a major component of the ETF growth story, but recent flows suggest the popularity of these generally low cost funds offering broad-based exposure to specific markets and sectors may be stronger than ever with investors, including institutions who may increasingly be using them as an alternative to more expensive futures contracts. To this point, 48% of total Canadian ETF flows has gone into core funds since the iShares Core series of ETFs were introduced to Canada in March 2014, even though 90% of new funds launched in that same time frame have been ETFs with non-core exposures.
2. International diversification
Canada’s stock market has underperformed many of its developed and emerging market counterparts this year after doing just the opposite in 2016. Not surprisingly, international equity has been one of the more popular ETF categories over the first six months as some investors sought potential opportunities in funds like iShares Core MSCI EAFE IMI Index ETF (XEF), which has attracted inflows of more than $450 million this year through September, according to BlackRock’s Follow the Flow data. While Canadian stocks could potentially rebound in the weeks ahead, BlackRock Investment Institute currently favours Europe, Japan and emerging markets.
3. Fixed income
Bond ETFs attracted more new money than any other asset class or category of exchange traded fund in Canada so far this year through September. This may be a sign that fixed income investors have grown more comfortable using ETFs to execute their investment views because of the potential benefits they offer, including low cost, more immediate market exposure, greater access to niche markets and potentially enhanced liquidity compared to individual bonds. To this end, iShares Canada has seen the dollar amount of custom creations – a process by which institutional investors convert their individual bond holdings into units of ETFs – double in the past year to over $1 billion through June, according to BlackRock data.
4. ETF options
The trading of ETF options has more than doubled since 2014 based on a daily average volume of contracts so far this year and last. The tremendous growth is being fuelled by increased liquidity across the ETF universe that, in turn, has made ETF options a more viable strategy for both institutional and retail advisors who want exposure to a particular market or sector without owning it directly.
5. “Active” providers
This year has been another busy one for new entrants to Canada’s ETF market. There are now 27 providers in the country, up from 18 at the end of 2016 and 12 at the end of 2015. What’s perhaps most notable about this steady increase is the number of active managers entering the fray with an ETF strategy alongside their existing mutual fund businesses. For example, Dynamic Funds and BlackRock Asset Management Canada Limited have joined forces to launch eight new active ETFs this year, including the Dynamic iShares Active Preferred Shares ETF (DXP), which has attracted over $230 million in assets under management through September of this year, according to BlackRock’s Follow the Flow data.
Alan Green is a director and head of iShares Capital Markets for BlackRock Canada.
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